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ASPAC andthe MultilateralInstrumentImplementing the Treaty

Related BEPS Provisions

2 ASPAC and the Multilateral Instrument

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3ASPAC and the Multilateral Instrument

On 7 June 2017, the OECD hosted a signing ceremony in

Paris for the Multilateral Convention to ImplementTax

Treaty Related Measures to Prevent Base Erosion and

Profit Shifting. Commonly referred to as the ‘Multilateral

Instrument’, or MLI, this convention was the subject

matter of Action 15 of the BEPS Action Plan.

The MLI was intended to provide a simplified mechanism

for implementation of the BEPS program which did not

involve laborious negotiation of each treaty.

The MLI was signed by 67 signatories covering 68

jurisdictions. Of these 67 signatories, Norway signed

the agreement but did not state any options or make any

notifications as this required parliamentary approval and

China signed the convention on behalf of Hong Kong.

Adding to these numbers, Guatemala subsequently

signed on 9 June and another 9 countries expressed a

commitment to sign at a future date: Cameroon, Cote

d’Ivoire, Estonia, Jamaica, Lebanon, Mauritius, Nigeria,

Panama andTunisia. It is expected that a second signing

ceremony will occur later this calendar year. Notable

absences from the list of signatories are the United

States and Brazil. Brazil has, however, been a keen

participant in the BEPS process and it is expected that

the country will sign-up in due course.



Table 1 outlines the countries covered by the MLI to date.

There are 7 from the Americas, 8 from Africa and the

Middle East, 11 from Asia-Pacific, 27 out of 28 EU Countries

(with Estonia expected to sign soon) and 15 other European

and Eurasian Countries.

Table 1: Signatories of MLI

= Intention to sign

Americas Africa & Middle East Asia-Pacific EU Other Europe – Eurasia

7 + 2 8 + 6 11 27 + 1 15

Argentina Burkina Faso Australia Austria Latvia Andorra

Canada Egypt China Belgium Lithuania Armenia

Chile Gabon Fiji Bulgaria Luxembourg Georgia

Columbia Israel Hong Kong Croatia Malta Guernsey

Costa Rica Kuwait India Cyprus Netherlands Iceland

Mexico Senegal Indonesia Czech Republic Poland Isle of Man

Uruguay Seychelles Japan Denmark Portugal Jersey

Jamaica South Africa Korea Finland Romania Liechtenstein

Panama Cameroon New Zealand France Slovakia Monaco

Cote d’Ivoire Pakistan Germany Slovenia Norway

Lebanon Singapore Greece Spain Russia

Mauritius Hungary Sweden San Marino

Nigeria Ireland UK Serbia

Tunisia Italy Estonia Switzerland

Turkey



MLI and optionality

On 24 November 2016 the OECD released a text version of

the MLI with an accompanying Explanatory Statement.This

document contains 39 articles which have been negotiated

by an ad hoc group of 99 countries.The articles were divided

into seven parts.Two parts involved scope, interpretation

and implementation. One part – PartVI – involved an option

for mandatory binding arbitration.The remaining four parts

dealt with any recommendations to changes in treaties

in the OECD Action Plan.This covered Hybrids (Action 2),

Treaty Abuse (Action 6), Permanent Establishments (Action

7) and Dispute Resolution (Action 14).

Those recommendations contained significant flexibility.

The MLI reflects this flexibility by providing for a large

number of options, although those options are very specific

and not open.The 7 June meeting and signing ceremony

provided a forum in which countries could publicly state

their positions on various options contained in the MLI

by lodging a document outlining a provisional list of

reservations and notifications (their “MLI Position”)

at the time of signature.

A key document released on 7 June contains three pages

of links leading to a template of notifications completed

by each country.These completed templates vary in

size, but most are about thirty pages long.They can be

accessed here: (http://www.oecd.org/tax/treaties/beps-mli-

signatories-and-parties.pdf).

On 24 November 2016 the OECD

released a text version of the MLI

with an accompanying Explanatory

Statement.This document

contains 39 articles which have

been negotiated by an ad hoc

group of 99 countries.The articles

were divided into seven parts.


http://www.oecd.org/tax/treaties/beps-mli-


The key choice each country has made involves selecting

which treaties the country wishes to be covered by the

MLI.This is provided for in Article 2 and invokes the concept

of a Covered Tax Agreement (CTA).

The complication is that simply by listing a country in

Article 2 does not mean that a country has negotiated an

agreement to change a treaty.There needs to be a match by

the counter-party.This can only be determined by going to

the counter-party notification under Article 2.

Technically the concept of a CTA is one where there is

a match.That is one where each party has notified the

Depository, being the OECD, that it wishes that agreement

to be covered by the MLI.

Thus, a distinction needs to be drawn between a country

listing a DoubleTax Agreement (DTA) with another country

as a CTA and their being an actual match that forms a CTA.

The distinction is significant.The 67 signatories have listed

2,365 treaties.There are however, only 1,103 matches.

Many countries have listed treaties where the counter-party

has not signed the MLI.Thus China, India and Australia have

all listed the United States as a CTA despite it being well

known that the United States has no current intention of

signing the MLI. Japan, by contrast, has not listed the

United States as a CTA.

Sometimes a treaty is listed by one country and not

another. China, for instance, has chosen not to list India

as a CTA, although India has listed China. Of the eleven

countries signing the MLI in the ASPAC region, Switzerland

has listed only India as a CTA although it has treaties with all

the others except Fiji.

Of the treaties between the 67 signatories approximately

85 percent are matched.

Covered Tax Agreements



Asia-Pacific

Eleven countries have signed the MLI in the Asia Pacific.

They are generally the larger countries. Six are in theTop 20

economies in terms of GDP: China, Japan, India, Korea,

Australia and Indonesia.The remainder are Fiji, Hong Kong,

New Zealand, Pakistan and Singapore.

Eleven Asia-Pacific countries chose not to sign the MLI.

They are Bangladesh, Cambodia, Laos, Malaysia, Mongolia,

Myanmar, Papua New Guinea, Philippines, Sri Lanka,

Thailand and Vietnam.

Amongst the eleven Asia-Pacific countries who signed the

MLI there are forty-four treaties.Thirty-seven treaties are

matched CTAs.This is about 84 percent which is similar to

the global average.The seven treaties which are not matched

CTAs are China-India, Korea-Australia, Korea-Indonesia,

Korea-Singapore, Indonesia-Pakistan, New Zealand-Fiji and

Hong Kong-China.This is displayed inTable 2.

Table 2 also outlines the matching of Asia-Pacific countries

with ten other selected countries. Generally, with the

exception of Germany and Switzerland, where there is a

treaty there has been a CTA match.This is not the case with

the Indonesia-Ireland, Indonesia-Mexico and Japan-Chile

treaties. By way of contrast, the Swiss treaties with all of

the Asia-Pacific signatories are not matched CTAs except

for the India-Swiss treaty. Germany has selected four CTAs

and declined five including the German-India, German-

Indonesia, German-Pakistan and German-Singapore

treaties.The German-Australian treaty has recently been

renegotiated to include BEPS provisions.

Table 2: Intra-ASPAC & Selected Countries – CTA Matches

CTA Match Treaty but no CTA match No DTA

Au

str

ali

a

Ch

ina

Fij

i

Ho

ng

Ko

ng

Ind

ia

Ind

on

esia

Ja

pa

n

Ko

rea

Ne

wZ

ea

lan

d

Pa

kis

tan

Sin

ga

po

re

Fra

nce

Germ

any

Ire

lan

d

Lu

xe

mb

ou

rg

Ne

the

rla

nd

s

Sw

itze

rlan

d

Un

ited

Kin

gd

om

Ca

na

da

Ch

ile

Me

xic

o

Australia

China

Fiji

Hong Kong

India

Indonesia

Japan

Korea

New Zealand

Pakistan

Singapore



Table 3 shows all the matched CTAs for the Asia Pacific

jurisdictions.The eleven countries had 658 treaties in total.

Of these, 321 or 49 percent were matched CTAs.

Table 3:ASPAC – Matched CTAs

Country Australia China Fiji Hong Kong India

Total matched CTAs 29 48 6 28 47

List of Matched

CTAs

Argentina, Belgium,

Canada, Chile, China,

Czech Republic,

Denmark, Fiji, Finland,

France, Hungary, India,

Indonesia, Ireland,

Italy, Japan, Malta,

Mexico, Netherlands,

New Zealand, Poland,

Romania, Russian

Federation, Singapore,

Slovak Republic, South

Africa, Spain,Turkey,

United Kingdom

Armenia, Australia,

Austria, Belgium,

Bulgaria, Canada,

Croatia, Cyprus, Czech

Republic, Denmark,

Egypt, Finland, France,

Georgia, Germany,

Greece, Hungary,

Iceland, Indonesia,

Ireland, Israel, Italy,

Japan, Korea, Kuwait,

Latvia, Lithuania,

Luxembourg, Malta,

Mexico, Montenegro,

Netherlands, New

Zealand, Pakistan,

Poland, Portugal,

Romania, Russia,

Serbia, Seychelles,

Singapore, Slovakia,

Slovenia, South Africa,

Spain, Sweden,

Turkey, UK

Australia, India, Japan,

Korea, Singapore,

United Kingdom

Austria, Belgium,

Canada, Czech,

France, Guernsey,

Hungary, Indonesia,

Ireland, Italy, Japan,

Jersey, Korea, Kuwait,

Latvia, Liechtenstein,

Luxembourg, Malta,


New Zealand, Pakistan,

Portugal, Romania,

Russia, South Africa,

Spain, UK

Armenia, Australia,

Austria, Belgium,

Bulgaria, Canada,

Colombia, Croatia,

Cyprus, Czech

Republic, Denmark,

Fiji, Finland, France,

Georgia, Greece,

Hungary,Iceland,

Indonesia, Ireland,

Israel, Italy, Japan,

Korea, Kuwait,

Latvia, Lithuania,

Luxembourg, Malta,


New Zealand, Poland,

Portugal, Romania,

Russia, Serbia,

Singapore, Slovak

Republic, Slovenia,

South Africa, Spain,

Sweden, Switzerland,

Turkey, United

Kingdom, Uruguay

Total number

of DTAs

44 105 11 37 92

Less: Not chosen

as a CTAs by

home country

1 5 0 1 0

Number of covered

agreements

selected by

home country

43 100 11 36 92

Less: Chosen CTA,

but other country

did not sign MLI

9 50 4 7 41

Less: MLI signatory,

but other country

did not choose

as CTA

4 1 1 1 3

Less: Norway

(seeking direction

from Parliament)

1 1 0 0 1

Matched CTAs 29 48 6 28 47

Percentage of

treaties matched

66% 46% 55% 76% 51%


ASPAC and the Multilateral Instrument 11

38 31 28 4 0 14 122

33 35 63 36 63 68 580

9 2 15 6 32 17 192

1 0 2 2 3 3 21

1 1 1 1 1 1 9

Indonesia Japan Korea New Zealand Pakistan Singapore Total

22 32 45 27 27 47 358

Australia, Belgium, Australia, Bulgaria, Belgium, Bulgaria, Australia, Belgium, Ireland, Poland, Australia, Austria,

Canada, China, Canada, China, Canada, Chile, Canada, Chile, Malta, Canada, Belgium, Bulgaria,

Croatia, Finland, Czech Republic, China, Columbia, Czech Republic, Belgium, Canada, China, Cyprus,

France, Hong Kong, Fiji, Finland, France, Croatia, Denmark, Denmark, Finland, Netherlands, Italy, Czech Republic,

India, Italy, Japan, Germany, Hong Egypt, Fiji, Finland, France, Germany, Turkey, Sweden, UK, Denmark, Egypt, Fiji,

Luxembourg, Kong, Hungary, France, Georgia, Hong Kong, India, Korea, Denmark, Finland, France, Georgia,

Netherlands, India, Indonesia, Germany, Greece, Indonesia, Ireland, China,Hungary, Guernsey, Hungary,

New Zealand, Ireland, Israel, Italy, Hong Kong, Italy, Japan, Mexico, Singapore, France, India, Indonesia, Ireland,

Poland, Seychelles, Korea, Kuwait, Hungary, Iceland, Netherlands, Poland, Finland, Egypt, Isle of Man, Israel, Italy,

Singapore, Slovakia, Luxembourg, India, Indonesia, Russian Federation, South Africa, Kuwait, Japan, Jersey, Latvia,

South Africa, South Mexico, Ireland, Israel, Italy, Singapore, South Romania, Portugal, Liechtenstein, Lithuania,

Korea,Turkey, UK Netherlands, New Japan, Kuwait, Africa, Spain, Austria, Japan, Luxembourg, Malta,

Zealand, Pakistan, Latvia, Lithuania, Sweden,Turkey, Spain, Serbia, Mexico, Netherlands,

Poland, Portugal, Luxembourg, United Kingdom, Czech Republic New Zealand, Pakistan,

Romania, Singapore, Malta, Mexico, China, Korea Poland, Portugal,

Slovak Republic Netherlands, New Romania, Russian

South Africa, Zealand, Pakistan, Federation, San Marino,

Sweden,Turkey, Poland, Portugal, Seychelles, Slovak

United Kingdom Romania, Russia, Republic, Slovenia,

Serbia, Slovakia, South Africa,Turkey,

Slovenia, South United Kingdom,

Africa, Spain, Uruguay, Seychelles,

Sweden, UK, Kuwait

Uruguay

71 66 91 40 63 82 702

22 32 45 27 27 47 358

31% 48% 49% 68% 43% 57% 51%



Selecting options

The MLI provides potential signatories with significant

flexibility to decide which portions of the MLI to adopt,

modify, or reject.This is designed to give rise to

maximum participation.

Indeed, the MLI provides various choices for both meeting

the minimum standards which concern treaty abuse and

dispute resolution and for other articles which all countries

elect to opt out of completely or partially.

Table 4 provides an outline of each of the options adopted by

the eleven Asia-Pacific countries.These are discussed below.



Table 4:ASPAC Country Selections in MLI

Country Australia China Fiji Hong Kong India

Preventing treaty abuse

Adopt new preamble

language

Yes, including Yes, including Yes, including Yes, including Yes

additional additional additional additional

preamble text preamble text preamble text preamble text

Adopt Principal PurposeTest

forTreaty Abuse

Yes Yes Yes Yes Yes

Adopt Simplified Limitations

of Benefits test

No No No No Yes additional S-LOB

Art 7 (17)(c)

Detailed Limitations of

Benefits test

No No No No No

Permanent Establishment rules

Adopt new dependent

permanent establishment rule

No No No No Yes

Choice on specific

activity exemption

Option A, with

13(6)(b) (not for

treaties that already

explicitly require

that each specific

activity exemption

is ‘preparatory

or auxiliary’)

No A No A

Adopt anti-fragmentation rule Yes No No No Yes

Adopt contract-splitting rule Yes with 14(3)(b)

reservation relating

to the exploration

for or exploitation of

natural resources.

No No No Yes

Adopt Mandatory

Binding Arbitration

Yes No Yes No No

Other rules

Article 3:Transparent Entities Yes, but France &

Japan Art 3(5)(d)

No (Art. 3(5)(a)

reservation)

Yes, no reservation No (Art. 3(5)(a)

reservation)

No (Art. 3(5)(a)

reservation)

Article 4: Dual Resident

Entities

Yes, but Art. 4(3)(e)

reservation replace

sentence 2 of para 1

Yes, no reservation Yes, but Art. 4(3)(e)

reservation

No (Art. 4(3)(a)

reservation)

Yes, no reservation

Article 5: Elimination of

DoubleTaxation

No option – counter- No option – counter- No option – counter-

party could choose party could choose party could choose

No: Art. 5(8)

reservation

No: Art. 5(8)

reservation

Article 8: Dividend

TransferTransactions

Yes, no reservation Yes, no reservation Yes, no reservation No: (Art. 8(3)(a)

reservation)

Yes, except Portugal

with >365 days

Article 9: Capital Gains Yes, except those

covered Art 9(6)(e)

No (Art. 9(6)(b)

reservation)

Yes, no reservation No: (Art. 9(6)(a)

reservation)

Yes: Art 9(4) chosen

by Article 9(8)

Article 10: PEs in

Third Jurisdictions

No (Art. 10(5)(a)

reservation)

No (Art. 10(5)(a)

reservation)


reservation)

Yes, no reservation

Article 11: Prevent treaties

restricting right to tax its

own residents

Yes, no reservation Yes, no reservation Yes, no reservation No (Art. 11(3)(a)

reservation)

Yes, no reservation

Article 15: Definition of a

person closely related

Yes, no reservation No (Art. 15(2)

reservation)

Yes, no reservation No (Art. 15(2)

reservation)

Yes, no reservation

Art 16: Mutual Agreed

Procedures

Yes Yes, Art 16(5)(a) Yes Yes Yes, Art 16(5)(a)

Art: 17 Corresponding

adjustments

Yes Yes Yes Yes (Art 17(3)(a)

reservation)

Yes (Art 17(3)(a)

reservation)



Indonesia Japan Korea New Zealand Pakistan Singapore

Yes Yes, including Yes Yes, but not additional Yes, including Yes, including

additional preamble preamble text (as all 36 additional additional

text; Germany considered to contain preamble text preamble text

already applies equivalent language)

Yes Yes Yes Yes Yes Yes

Yes additional S-LOB

Art 7 (17)(c)

No No No No No

No No No No No No

Yes Yes No Yes No No

A A No Option A No Option B

Yes Yes No Yes No No

Yes No No Yes No No

No Yes No Yes No Yes

No (Art. 3(5)(a)

reservation)

Yes, but Art. 3(5)(f), Art.

3(2) not apply

No (Art. 3(5)(a)

reservation)

Yes, no reservation No (Art. 3(5)(a) No (Art. 3(5)(a)

reservation) reservation)

Yes, Art. 4(3)(c) for

TUR & USA & Art 4(3)

(e) replace sentence 2

para 1

Yes, but Art. 4(3)(e)

reservation replace

sentence 2 of para 1

No (Art. 4(3)(a)

reservation)



No option – counter- No option – counter-

party could choose party could choose

No: Art. 5(8)

reservation

No option – counter-

party could choose

No: Art. 5(8) No: Art. 5(8)

reservation reservation

Yes, no reservation No: (Art. 8(3)(a)

reservation)

No: (Art. 8(3)(a)

reservation)

Yes, no reservation No: (Art. 8(3)(a) No: (Art. 8(3)(a)


Yes: Art 9(4) chosen by Yes: Art 9(4) chosen by

Article 9(8) Article 9(8)

No: (Art. 9(6)(a)

reservation)

Yes: Art 9(4) chosen by

Article 9(8)

No: (Art. 9(6)(a) No: (Art. 9(6)(a)


No (Art. 10(5)(a)

reservation)


reservation)




reservation)

No (Art. 11(3)(a)

reservation)



Yes, no reservation Yes, no reservation No (Art. 15(2)

reservation)

Yes, no reservation No (Art. 15(2) No (Art. 15(2)


Yes, Art 16(5)(a) Yes Yes Yes Yes Yes, Article 16(5)(a)

Yes (Art 17(3)(b)

reservation)

Yes Yes (Art 17(3)(a)

reservation)

Yes Yes Yes



Minimum standard to prevent treaty abuse (including PPT and LOB)

The MLI provides options for implementing the minimum

standard to combat treaty abuse outlined in the final

report for Action 6 of the BEPS Action Plan.The minimum

standard requires that countries:

1. include in their tax treaties an express statement that

their common intention is to eliminate double taxation

without creating opportunities for non-taxation or

reduced taxation through tax evasion or avoidance

including through treaty-shopping arrangements; and

2. address treaty shopping by, at a minimum, implementing

(i)a Principal PurposeTest (PPT), (ii) a PPT and a

simplified or detailed limitation on benefits provision

(LOB), or (iii) a detailed LOB, supplemented by a

domestic law mechanism that would deal with conduit

arrangements not already dealt with in the tax treaty.

Article 6 of the MLI offers options for treaty preamble

language that would address the first leg of the minimum

standard and Article 7 of the MLI offers options for

addressing the second leg of the minimum standard.

Article 6 – Preamble to treaties

With respect to the first leg, signatories to the MLI are

only permitted to opt out to the extent a CTA already

contains language satisfying the minimum standard.

Japan has selected this option in relation to its treaty with

Germany. For other Asia Pacific treaties the new wording

will apply.This will mean matched CTAs will contain the

following wording:

“Intending to eliminate double taxation with respect

to taxes covered by this agreement without creating

opportunities for non-taxation or reduced taxation through

evasion or avoidance (including through treaty-shopping

arrangements aimed at obtaining reliefs provided in this

agreement for the indirect benefit of residents of third

party jurisdictions).”

In addition the MLI provides countries with an option to

include additional preamble text.This preamble is

“Desiring to further develop their economic relationship

and to enhance their co-operation in tax matters.”

Australia, China, Fiji, Hong Kong, Japan, Pakistan and

Singapore have opted to include this additional text. India,

Indonesia and Korea have chosen not to do so. New

Zealand has also chosen not to do so on the basis that

additional preamble is already covered in their treaties.

Article 7 –Anti-treaty shopping rule

Action 6 provided for three different forms of anti-treaty

shopping.The first and default rule is the PPT. It is a

general anti-avoidance rule for treaties which applies to

deny treaty benefits where obtaining a treaty benefit was

one of the principal purposes of the arrangement.

Specifically it states:

“Notwithstanding any provisions of a CoveredTax

Agreement, a benefit under the CoveredTax Agreement

shall not be granted in respect of an item of income

or capital if it is reasonable to conclude, having regard

to all relevant facts and circumstances, that obtaining

that benefit was one of the principal purposes of any

arrangement or transaction that resulted directly or



indirectly in that benefit, unless it is established that

granting that benefit in these circumstances would be in

accordance with the object and purpose of the relevant

provisions of the CoveredTax Agreement.”

All parties to the MLI have signed up to the PPT.There is,

however, an additional optional PPT rule which requires

relevant Competent Authorities to consult before rejecting a

taxpayer’s request for benefits. Australia, Fiji, New Zealand,

Pakistan and Singapore have chosen this additional option.

Hong Kong has chosen to exclude its treaties with Belarus

and Pakistan from Article 7 on the basis that those treaties

already contain a PPT rule.

The second rule is a Simplified Limitations of Benefits

article referred to by the acronym S-LOB.This is a

supplementary and optional rule which grants treaty

benefits only to particular ‘qualified persons’. These

comprise individuals, government entities, certain listed

companies, non-profit organisations, pension funds,

entities that are engaged in active businesses or entities

that meet specified ownership requirements.

There are twelve countries that have chosen to

supplement the PPT with an S-LOB: India and Indonesia in

the Asia-Pacific, Argentina, Chile, Columbia, Mexico and

Uruguay in Latin America and Armenia, Bulgaria, Russia

and the Slovak Republic.

The third rule is a detailed limitation of benefits rule or

D-LOB which would need to be separately negotiated

outside the MLI.

“Intending to eliminate double

taxation with respect to taxes

covered by this agreement

without creating opportunities for

non-taxation or reduced taxation

through evasion or avoidance

(including through treaty-shopping

arrangements aimed at obtaining

reliefs provided in this agreement

for the indirect benefit of residents

of third party jurisdictions).”



Changes to the PermanentEstablishment ArticleArticles 12 to 14 of the MLI deal with Action 7 which

concerns when a permanent establishment (PE) is created.

This is the dividing line between when a company is

considered to be selling to a country and thus not taxable

and when it is selling within a country and taxable.

Action 7 is not a minimum standard.Thus, countries are free

to opt out or selectively adopt the provisions relating to PEs.

Article 12 – Expansion of the Dependent

Agent Standard for creating a PE

Article 12 of the MLI expands the standard for when a

dependent agent creates a PE of the principal to include

situations in which the dependent agent “habitually plays

the principal role leading to the conclusion of contracts that

are routinely concluded without material modification by

the enterprise.”

This is wider than most current treaties in three respects.

Firstly, it lowers the bar of behavior that will give rise to a PE

by a dependent agent. Generally, this bar is currently met if

the dependent agent has an authority to conclude contracts

on behalf of the non-resident. For those adopting the new

standard the dependent agent need only “habitually play

the principal role leading to the conclusion of contracts”.

Secondly, while existing dependent agent PE provisions

typically cover only the conclusion of contracts that are

‘in the name of’ or binding on the principal, Article 12 also

covers contracts for the transfer or use of property of the

principal, or for the provision of services by the principal.

This will impact many civil law countries, such as France

and Germany, where the adoption of this change would

cause commissionaires and other dependent agent

arrangements to be treated as PEs.

Thirdly, Article 12 provides that an agent is not independent

if that agent works exclusively or almost exclusively on

behalf of one or more closely related enterprises.

Article 12 has caused significant concern on the basis that

companies may become taxable in a jurisdiction where

that was not previously the case.This, it is feared, will lead

to greater disputation. The second concern is that the

new rules will lead to a proliferation of permanent

establishments throughout the world.

In the Asia-Pacific, Australia, China, Hong Kong, Korea,

Pakistan and Singapore have chosen not to adopt the new

PE definition. By way of contrast, New Zealand, Fiji, India,

Indonesia and Japan, have elected to include this provision

in their CTAs.

In the EU most have chosen not to adopt the new

dependent agent PE article. France, Netherlands and Spain

are exceptions. By way of contrast all the Latin American

signatories have chosen the new article. Middle Eastern

and African signatories are split on the issue.

Article 13 – Changes to the application of

the SpecificActivity Exemptions

Most treaties currently identify specific activities, such as

warehousing or purchasing goods, that may be carried on

at a location without creating a PE. BEPS Action 7 raised

concerns that these exceptions to the definition of a PE

were being used to artificially avoid a PE.



Option A would limit the availability of all specific activity

exemptions to circumstances where the activity is of a

‘preparatory or auxiliary’ character based on an evaluation

of the facts and circumstances. A number of Asia-Pacific

jurisdictions elected option A including: Australia, New

Zealand, Fiji, India, Indonesia, and Japan.

Only one jurisdiction in the Asia-Pacific, Singapore, elected

option B. Option B has a lesser impact and, in effect, inserts

a requirement that some but not all the specific activity

exemptions must be of a preparatory or auxiliary character.

The remaining ASPAC jurisdictions – China, Hong Kong,

Korea and Pakistan – opted out of Article 13 entirely.

Article 13 –Anti-fragmentation rule

Article 13 also provides an anti-fragmentation provision.

The provision operates to cause the specific activity

exemptions not to apply when an enterprise or a closely

related enterprise carries on business activities in one or

more places in the same State, and either (1) the place

constitutes a PE for one of the related enterprises, or (2)

the overall activity resulting from the combination of the

activities is not of a preparatory or auxiliary character.

Of those ASPAC jurisdictions that adopted Article 13,

a majority elected to adopt the anti-fragmentation rule

including: Australia, New Zealand, Fiji, India, Indonesia,

and Japan. One jurisdiction, Singapore, opted out of this

specific provision.

Article 14 – Contract splitting rule

Article 14 of the MLI aims to prevent artificial avoidance

of a PE through splitting up contracts. Generally, Article

14 requires aggregation of time spent (in excess of 30

days in the aggregate) at a building site or construction or

installation project by the enterprise and connected

activities carried out (during periods that exceed 30 days)

by closely related enterprises at the same building site or

construction or installation project during different periods

of time.

A minority of ASPAC jurisdictions elected to adopt the anti-

contract splitting rule including: Australia, New Zealand, Fiji,

and Indonesia. Most jurisdictions opted out of this specific

provision including: Singapore, China, Hong Kong, India,

Japan, Korea and Pakistan.

A minority of ASPAC jurisdictions elected to adopt the anti-contract splitting rule including:

Australia, New Zealand, Fiji, and Indonesia. Most jurisdictions opted out of this specific

provision including: Singapore, China, Hong Kong, India, Japan, Korea and Pakistan.



Arbitration

Article 18 – Mandatory BindingArbitration

The Mutual Agreement Procedures in tax treaties generally

provide taxpayers with a mechanism to seek assistance

from Competent Authorities from the two jurisdictions to

resolve a dispute under the treaty.These disputes usually

arise when both jurisdictions are seeking to tax the same

economic gain.These rules, however, do not require

the Competent Authorities to resolve the dispute and

sometimes they remain unresolved indefinitely.

The MLI includes optional provisions for mandatory binding

arbitration in what is known as Part VI. Articles 18 to 26 of

the MLI provides flexibility for countries to bilaterally agree

on the mode of application of the MBA, including the form

of arbitration.

The MLI provides for ‘final offer’ arbitration as the default

type of arbitration process.This is also known as ‘baseball

arbitration’ or ‘either/or’ arbitration. Here the arbitrator can

choose either one or the other of the two parties’ positions

but cannot choose an intermediate position.This form of

arbitration is intended to create an incentive of the parties to

adopt reasonable positions rather than make ‘ambit claims’.

However, countries may make a reservation on the

‘final offer’ type of arbitration proceedings and apply

the ‘independent opinion’ type of proceedings instead.

Five ASPAC jurisdictions opted to include arbitration in

their CTAs, including: Australia, New Zealand, Singapore,

Fiji, and Japan. Of these, only Japan made a reservation to

apply the ‘independent opinion’ type of proceedings.



Other articles

There are 10 other articles in the MLI which will have a

narrower impact.

Article 3 –Transparent entities

This article seeks to deal with double non-taxation or

excessive double tax relief where a fiscally transparent

vehicle such as a partnership or trust is treated in one

manner in one jurisdiction (e.g. transparent) and in another

manner in another jurisdiction (e.g. opaque).

Australia has adopted this provision, but not for its

treaties with France and Japan which already have similar

provisions. Japan has adopted the rule in relation to double

non-taxation, but not in relation to double tax relief. Fiji and

New Zealand have adopted the rules without reservation.

China, Hong Kong, India, Indonesia, Korea, Pakistan and

Singapore have elected not to apply the rules.

Article 4 – Dual resident entities

Where a person is a resident of two jurisdictions under

respective domestic laws, treaties generally provide a tie-

breaker rule to determine residence.That is commonly the

Place of Effective Management. It was perceived that this

could be open to abuse and that an expanded set of criteria

should apply. Article 4 seeks to include other factors and

provide for Competent Authorities to endeavor to agree on

a single jurisdiction as the tax resident. However, there is

also a power for the Competent Authority to provide relief

from tax as they feel appropriate if they cannot agree on a

single jurisdiction.

China, India and New Zealand have agreed to this position.

Australia, Fiji, Indonesia and Japan have provided that if the

Competent Authorities cannot agree on a single jurisdiction

then all relief is denied. Hong Kong, Korea, Pakistan and

Singapore have opted not to apply this provision.

Article 5 –Application of methods for

elimination of double taxation

This article seeks to address a situation where a

treaty provides an exemption method for relieving

double taxation, but there is no taxation in the foreign

jurisdiction.This article substitutes a tax credit method in

circumstances based on one of three options: Option A

– income that the treaty allows the other party to exempt

or tax at a reduced rate: Option B – dividends that are tax

deductible in the other country or Option C – all types of

income that the treaty allows the other country to tax.

No Asia-Pacific country has adopted Article 5. Australia,

China, Fiji, India, Japan and New Zealand will allow a

counter-party to make a choice based on any option.

Article 8 – Dividend transfer transactions

Many treaties provided for a concessional tax treatment for

dividends paid to non-resident shareholders based on their

level of ownership.This rule requires that shares be held for

a minimum holding period of 365 days before the reduced

tax rate will apply.

Australia, China, Fiji, Indonesia and New Zealand have

adopted this rule. So has India but with the exception of

its treaty with Portugal which has a longer withholding

period in any event. Hong Kong, Japan, Korea, Pakistan and

Singapore have rejected this rule.

Article 9 – Capital gains from the alienation

of shares in land rich vehicles

This is similar to Article 8. Article 9 will introduce a 365

day period for testing whether a relevant entity is land-rich

for the purpose of determining whether a jurisdiction has

a right to tax real property gains where there has been an

indirect disposal.There are two clauses that could apply.



The main clause simply provides a timing rule.There is an

extended clause which provides a reference to the relevant

interests that need to be evaluated.

India, Indonesia, Japan and New Zealand have adopted

the extended clause. Australia has adopted the main

clause, but with the preservation of the wording of existing

agreements where such clauses exist. Hong Kong, Korea,

Pakistan and Singapore have not adopted this clause.

Article 10 –Anti-abuse rule for

Permanent Establishments situated

inThird Jurisdictions

Tax treaties often protect a taxpayer from being taxed in

another jurisdiction where they are resident in another

jurisdiction. A resident of a treaty jurisdiction may, however,

establish a branch in a third jurisdiction.Their home

jurisdiction may provide for an exemption from taxation for

the branch income located in the third jurisdiction.This may

result in low or no taxation.

Article 10 seeks to deal with this by allowing a domestic

rate of tax, rather than a treaty concessional rate of tax

where profits of the branch are exempt in the other tax

jurisdiction and taxed below 60 percent of the tax that

would have been payable if the income was not exempt but

taxed in the other jurisdiction.

Of the ASPAC Countries, Australia, China, Hong Kong,

Indonesia, Korea, Pakistan and Singapore have chosen not

to apply the provision. Fiji, India, Japan and New Zealand

have accepted Article 10.

Article 11 – Preventing treaties restricting

rights for a country to tax its own residents

Generally treaties are used to restrict a country’s right to

tax non-residents. It has been argued that treaties can be

used to restrict a country’s right to tax its own residents.

This article seeks to ensure that this is not the case except

in certain specific circumstances which are outlined in

the article. An example of an exception is where a treaty

has a provision that restricts a country’s ability to tax one

of its own resident individuals if that individual derives

personal services income in another country. Some treaties

restrict taxation for their own residents where the person

is a teacher, professor or student who meets specific

conditions outlined in the treaty.

Australia, China, Fiji, India, Indonesia and New Zealand have

accepted this provision. Hong Kong, Japan, Korea, Pakistan

and Singapore have rejected it.

Article 15 – Definition of person closely

related for the purposes ofArticles 12, 13

and 14

This is a minor definitional clause which is designed to

apply where changes have been made to the Permanent

Establishment article. Broadly it is a control or 50 percent

direct or indirect beneficial ownership test.

The countries in the Asia-Pacific who have adopted one or

more of Articles 12, 13 or 14 have also agreed to Article 15.

They are Australia, Fiji, India, Indonesia, Japan and New

Zealand.The remaining countries – China, Hong Kong,

Korea, Pakistan and Singapore – have rejected all of the

Permanent Establishment changes and thus have also

rejected Article 15.



Article 16 – MutualAgreement Procedures

Mutual Agreement Procedures or MAPs are designed to

provide taxpayers with a mechanism for resolution of tax

disputes under a treaty. Article 16 seeks to improve the

efficiency of these rules by allowing taxpayers to present

a case to either Competent Authority of either treaty

jurisdiction, requiring taxpayers with a 3 year time limit to

request MAP assistance, and requiring the respective

Competent Authorities to endeavor to resolve the case

by mutual agreement and any difficulties arising from the

interpretation of the treaty.

Countries can adopt the article but reserve in relation

to each of the three components. All the Asia-Pacific

signatories have adopted the MAP procedures, except that

China, India, Indonesia and Singapore have not agreed that

a taxpayer can seek resolution of the dispute from either

Competent Authority.

Article 17 – Corresponding adjustments

Adjustments arising from disputes in one jurisdiction,

particularly involving transfer pricing, can lead to double

taxation unless a corresponding adjustment is made in

another jurisdiction.This Article requires a tax authority to

make a downward adjustment in one jurisdiction where

an upward adjustment has been made in the other treaty

jurisdiction which reflects the true allocation of profits in

accordance with arm’s length principles.

Apart from Indonesia, which has made a reservation to the

effect that all corresponding adjustments must be dealt

with under the MAP procedures, the Asia-Pacific Countries

have accepted this rule. Hong Kong, India and Korea have

made a reservation to preserve the existing corresponding

adjustment rules in their treaties where they exist.


Future process andeffective datesThe MLI is subject to a ratification process which will vary

from country to country. Each country must deposit a

notice with the OECD once that local ratification procedure

has taken place.

Technically, the MLI will not enter into force until three

months after at least five jurisdictions have deposited such

ratification notices. It is expected that this will occur this

calendar year.

Thereafter, the MLI generally enters into force with respect

to a jurisdiction on the first day of the month following a

period of three months after it deposits its ratification notice

with the OECD.

Then the MLI enters into effect with respect to a particular

treaty depending on the nature of the tax concerned. For

withholding taxes, the new treaty rules would apply from

the first day of the calendar year that begins after the latest

of the dates on which the MLI enters into force for each of

the parties. For all other taxes, the new treaty rules would

apply for taxable periods beginning after the expiration of a

period of six months from the latest of the dates on which

the MLI enters into force for each of the parties.



What is to be done?

Changes to treaties brought about by the MLI requires a

revaluation of multinational supply chains and the use of

regional holding companies, particularly in light of the

new PPT. In the Asia-Pacific use of holding companies in

Singapore and Hong Kong in particular will need to be

considered in the context of the substance and commercial

purpose of the particular structure.

For many this will require an evaluation both up and down

the chain of companies within a structure. It may also

impact all forms of profits and capital gains and not simply

dividend, interest and royalty flows.The need for evaluation

extends beyond multinationals to collective investment

vehicles, pension funds and sovereign wealth funds.

In short, Chief Financial Officers and ChiefTax Officers will

need to do the following:

1. identify any structures which rely on treaty outcomes

which rely on the interposition of one or more holding

companies

2. identify the treaties involved and how they may be

impacted by the MLI

3. identify the treaty benefits that could be subject to change

4. consider whether reorganization is required based on the

PPT or other provisions such as the PE article changes or

the third party branch rules

5. if a restructure is required, propose a solution that would

meet the new standards and document why the new

structure would meet those standards

6. if a restructure is not required, document the commercial

purposes and analysis of the substance of the

arrangement to defend any potential future review by

taxation authorities

7. consider whether it would be appropriate to obtain ‘sign-

off’ from various revenue authorities to provide certainty

in relation to the arrangements; and

8. consider whether revenue authority ‘sign-off’ should

also be undertaken in the context of other rule changes

or potential issues including transfer pricing analysis,

Diverted ProfitsTax (Australia & the UK) and other anti-

avoidance provisions if potentially applicable.



The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence

a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one

should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any

loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).


Contact us

Simon Clark Regional Tax Partner ASPAC Lead, Alternative Investments T: +64 6213 2152E: [email protected]

Chiu Wu Hong Head of Tax, Singapore

T: +65 6213 2569E: [email protected]

Gordon LawsonHead of International Tax,SingaporeT: +64 6213 2864E: [email protected]

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KPMG

16 Raffles Quay

#22-00 Hong Leong Building

Singapore 048581

T: +65 6213 3388

David LinkeNational Managing Partner, Tax, AustraliaT: +2 9335 7695E: [email protected]

Christopher Xing International Tax Leader,Asia PacificT: +861085087072E: [email protected]

Khoon Ming Ho Head ofTax Asia PacificT: +861085087082E: [email protected]

Lewis Lu Head of Tax KPMG ChinaT: +862122123421E: [email protected]

Lisa AptedTax Partner, Australia

T: +679 3301 155E: [email protected]

Curtis Ng Head of Tax, Hong Kong

T: +85221438709E: [email protected]

Girish Vanvari Head of Tax, India


Abraham Pierre Head of Tax, Indonesia


Yuichi Komakine Head of Tax, Japan


Jeong Wook Choi Head of Tax, South Korea


Ross MckinleyNational Managing Partner, Tax, New Zealand


Saqib MasoodHead ofTax, Pakistan


Grant Wardell-JohnsonLeader,AustralianTax CentreT: +2 9335 7128E: [email protected]

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